Three Reasons Why 100 Yen Is Bad News for World

William Pesek

May 13, 2013, 5:00 PM EDT

May 14 (Bloomberg) -- The smile on Kazuo Hirai’s face shows
why the yen’s drop below 100-to-the-dollar is as much a curse
for Japan as a blessing.

The Sony Corp. chief executive officer is beaming because
his company has produced its first profit in years. Did the
troubled giant that redefined consumer electronics with the
transistor radio and then the Walkman dream up a new gadget
better than Apple Inc.’s iPhone, iPad or iPod? No. Has Sony
raised productivity or halted dangerous infighting between
departments? Nope. Is the company cutting costs and staff
quickly enough to compete in a rapidly changing marketplace?
Hardly.

No, Sony’s 43 billion-yen ($422 million) profit for the
fiscal year ended March 31 largely grew out of one thing: the
yen’s more than 20 percent plunge against the dollar since
November. The problem is that the swooning currency -- which has
made Sony’s Playstations and Blu-ray players far cheaper for
customers abroad -- is taking the onus off Hirai and the rest of
Japan Inc. to claw their way back through innovation and
improved efficiency.

That’s one of three reasons why Prime Minister Shinzo Abe’s
much-hailed success at debasing the yen isn’t the godsend that
executives and investors seem to think. The other two: Japan’s
growing appetite for energy imports, and the steadily increasing
likelihood of a currency war.

Losing Its Way

Perhaps no company is more emblematic of Japan Inc.’s need
to reinvent itself than the one Akio Morita and Masaru Ibuka
founded amid the rubble of 1946. What many Americans feel about
Henry Ford or Steve Jobs, Japanese think of Sony’s founders.
Their fabled success was a cornerstone of Japan’s post-World War
II resurgence. Then Sony, much like Japan, lost its way. The
transition from rapid expansion and ballooning profits to stable
growth proved difficult. In the years after Japan’s 1980s asset
bubble burst, Sony found itself bloated, sitting on too much
debt and devoid of the creative spirit that once revolutionized
entire industries. Today, Sony exemplifies Japan’s plight --
pressed on all sides by rising, nimble and low-cost rivals.

Like his predecessor Howard Stringer, Hirai spends much of
his time working to streamline the company, and the rest praying
for a weaker yen. Now that Abe has delivered the latter, will
Hirai forget why Sony became an also-ran compared with rivals
such as Samsung Electronics Co. and Apple Inc.? Sony’s problem
has never been the yen. The problem is that other than the
occasional blockbuster movie, the company no longer makes things
that consumers want.

All-Clear Sign

German exporters don’t bellyache about exchange rates; they
adapt, innovate and continue to make money. Japan has never
learned that lesson -- and it’s not likely to do so this time.
There’s a real risk that companies like Sharp Corp. and Nissan
Motor Co. will see the weakening yen as an all-clear sign to
stop reinventing themselves and thinking up new technologies and
products. The moment Japan Inc. collectively does that,
“Abenomics” will become more of a threat to the future than a
revitalization plan.

Second, Japan is now importing more energy than it has in
decades. Ever since the March 2011 earthquake and radiation
crisis in Fukushima, there has been a massive public backlash
against nuclear power. With all but two of its 54 reactors now
offline, resource-starved Japan has to buy more and more oil,
coal and gas from overseas.

Earlier this month, Abe brought a 100-strong delegation of
Japanese business leaders to Russia, Saudi Arabia, Turkey and
the United Arab Emirates to seek out energy bargains. No matter
how cheap the deal, though, today’s yen buys a lot less than
before.

Energy Bills

Higher energy prices passed along to consumers and
companies will undermine Abenomics. The government’s fiscal
trajectory will grow uglier as it subsidizes rising energy
bills. Also, the combination of a weaker yen and growing demand
for energy could cause the wrong kind of inflation. Replacing
deflation with stagflation isn’t progress in anyone’s book.

Consider the dilemma facing exporters, too. Fujitsu Ltd.
plans to raise domestic computer prices as the yen’s drop to a
four-and-a-half-year low boosts the cost of importing
components. Toshiba Corp. says it may do the same. How are
companies like Panasonic Corp. that aggressively moved
production to China going to add jobs in Japan to help Abenomics
along? It will be enough of a challenge to sell to Japanese,
whose purchasing power is waning.

Currency Wars

Third, the yen’s weakness is sure to increase global
tensions. Trade partners, including Australia, New Zealand, the
Philippines, South Korea, Switzerland and Thailand, are
scrambling to cap their currencies. What happens when China,
already at loggerheads with Japan over a disputed set of
islands, joins them?

Japan avoided a formal rebuke from Group of Seven finance
chiefs over the weekend. Yet we live in a Group of 20 world, and
key members such as China won’t sit idly by as Japan does
exactly what the West is warning officials in Beijing not to do.
As China’s growth slows, President Xi Jinping may well turn to a
weaker yuan to boost exports, happily taking political cover in
Abe’s own devaluation efforts.

None of this seems to worry Japan’s corporate chieftains.
Consider the reaction of Nissan’s Carlos Ghosn, one of Japan’s
most talented CEOs over the last decade, to the yen’s plunge:
“The headwinds have been removed, but there are no tailwinds.”
Translation: We need a bigger devaluation. Sadly, that’s
precisely the kind of complacency that brought Japan Inc. to
this pass in the first place.

(William Pesek is a Bloomberg View columnist. The opinions
expressed are his own.)